July 2012

07/31/2012

Members of the armed forces about to be deployed have a lot on their minds, but one thing on the checklist needs to be making sure their legal and financial affairs are in order. With a little planning, servicemen and women deployed overseas can serve their country with the peace of mind that comes from knowing that their family and their future security are provided for.

For too many of us, the necessities of estate planning are easy to forestall. However, for a military family, the exigencies of the present are too great to ignore. Proper planning is an immediate concern.

Essentially, military plans always are based on battlefield “contingencies.” Whether over there or on the home front, changes on the “battlefield” are hard to predict. For example, for a deploying soldier (sailor, airman, marine or coast guardsman), have you secured enough life insurance to provide for your family? If yes, does your life insurance specifically carve out war, war-risk, service casualties, and the like as exclusions? Regardless, make sure you maximize any government-offered life insurance, as it does not exclude such risks.

Ultimately, do not ignore making proper estate plans as well. Be sure to coordinate your estate planning with the beneficiary designations on your life insurance and other assets. While a Legal Assistance Officer in your local Judge Advocate General’s Office can assist, most state bar associations have attorneys who will assist you at little, if any, financial cost.

Which taxes qualify for the protective claim? Estate taxes, income taxes, even gift taxes. In fact, any time you feel you overpaid a tax you can file for a refund, if you have a good reason.

The legality and constitutionality of same-sex marriage has not been far from the news or the estate planning of some who are affected. This particularly is true after the ruling of U.S. District Court Judge Barbara S. Jones in Windsor v. United States.

When it comes to “same-sex” estate planning, there are significant tax burdens at play. However, according to a recent article in MarketWatch titled “Ruling poses tax issues for same-sex couples,” that doesn’t mean that you have to consider the protective claim.

So, what is a protective claim? Any form of taxation is subject to a sort of protective claim. All that is required is that you pay your tax and then file an amended return. It should be filed on the basis of what your return should be if current litigation is decided in that favor.

Still, the stakes are simply that much higher in this case with the many tax benefits that marriage as a federally-recognized institution brings. Some may consider it premature, but, in the case of either income taxes or estate taxes, taking the defensive position of a protective claim may be worth it. At the very least, there’s nothing to lose.

TIME may — or may not — be running out for one of the biggest tax breaks for wealthy Americans: the chance to give up to $5.12 million to heirs tax-free and then pay a comparatively low 35 percent rate on any gift above that. The break is scheduled to expire in six months, but no one will hazard a guess about its fate because it is just one of many tax and spending measures expiring at the same time.

A few poignant reminders never hurt anybody, especially when the issues are this pressing. Case in point: There are fewer than six months remaining to make use of the $5.12 million gift tax exemption.

If you have not noticed, communication between Congress and the White House is rather contentious. After all, it is an election year and the stakes are high regarding the future of our country. Who will control the levers of power in 2013? That question will not be answered until November 6. In the meantime, the future of the gift tax (and the estate tax) hangs in the balance.

Against the backdrop of this uncertainty, one known is that the $5.12 million gift tax exemption is available through December 31, 2012. That amount (or $10.24 million, if married) is yours to give – in liquid assets, unappreciated stock, real estate, or what have you – but only until the end of the year. The New York Times recently addressed this issue in a recent article titled “To Give or Not to Give, Up to $5.12 Million.”

In the end, you may find yourself in this very real tax predicament. You could be stuck between the known and the unknown, 2012 and 2013 gifting exemptions, or, a rock and a hard place.

Depressed Medicare beneficiaries in the so-called coverage doughnut hole were more likely to cut back on their antidepressants than those who had full insurance coverage, a study has found.

Even with the Affordable Care Act (ACA) well in place and affirmed by the Supreme Court, the costs paid and lifestyles lived by many is being tied to the “doughnut hole.” This especially is true for seniors taking depression medications.

As recently reported in Med Page Today, a new study by Yuting Zhang, PhD, of the University of Pittsburgh, Medicare may not fully cover depression medications for seniors, despite the ACA. The article is titled “Antidepressants 'Fall' Through Doughnut Hole.”

If you are unfamiliar with the “doughnut hole” issue, you are not alone. It is the coverage gap created by Medicare Part D. For those whose income is at the lower end, there tends to be coverage. Likewise, for those who have an upper-end income, there is still coverage… with a gap in between.

According to the new study, and sheer intuition, patients that fall within the doughnut hole are associated with a significant drop in medication use – 12% on average. That is always relevant, but perhaps especially so in the case of depression medication. While discontinuing any prescribed medication is never advisable, it is often easier to justify foregoing depression medication than other medications.

I certainly recommend reading the original article for more details regarding this study, should this issue be relevant to you or someone you love.

Estate planning tends to focus on minimizing taxes, especially for high-net-worth individuals, but personal problems may be more pressing for some clients. For such people, the success of the planning process hinges more on dealing with their issues than with their legal, tax and technical matters.

Of the three essential elements to any estate plan, namely, the legal, the financial, and the human factor, the latter can be the most difficult. This challenge was the subject of a recent article in Financial Planning appropriately titled “The Human Factor.”

Generally speaking, the human factor in any estate plan is the sum total of your personal, interpersonal, and family relationships and problems. Planning for these matters means taking everything you know and everyone you love into consideration. While the details will vary according to your own unique circumstances, the Financial Planning article provides some practical guidance.

For example, have you considered the needs of yourself or your spouse (if married), should old age catch up with you physically or mentally? What about the potential of a likely heir having spendthrift tendencies or a substance addiction? Have you given thought to heirlooms and other items of tangible personal property that could trigger family feuds in the absence of clear inheritance direction?

Is that all? Hardly. It does, however, help to get you (and me) thinking about the “human factor” when it comes to our estate planning.

07/21/2012

In today's tough economy, you may decide to loan money to a cash-strapped family member. While this may be a noble cause, please take my advice and make the loan the tax-smart way.

Sometimes ensuring that a loved one has the assets they need – for a project or just for general use – will mean that you’ll be treading a fine line between making a “gift” and making a “loan.” The problem is that these are very different concepts, especially as far as the IRS is concerned.

In brief, if you’re going to make a family loan, make it a real one or else consider an outright gift to be taxed by the IRS accordingly.

The fine line between a loan and a gift is not a new one. This topic was explored in a recent article in SmartMoney titled “Making a Tax-Smart Family Loan.” Essentially, you need to remember that “loans” are what you make when when you aren’t interested in losing money and are probably trying to gain. To be a loan, the transferred amount must come with a standard interest rate. In fact, to be considered a “loan” the interest rate must be at least equal to the “applicable Federal Rate,” as determined monthly by the IRS.

If you don’t charge the objective rate of interest, then you’ve essentially given that much away. Not surprisingly, that’s exactly how the IRS chooses to view the situation and, in return, it will hold you accountable for the interest not charged. As a result, this imputed interest can eat into your gift tax exemption amounts, whether annual or lifetime.

Essentially, no loan to a family member should be considered a strictly off-the-books and casual affair. If you find yourself caught between making a gift or a loan, then you must choose one or the other and properly frame the transfer as such.

07/20/2012

Sometimes managing family assets is like, well, running a business. Then again, some families actually do run their families like businesses and have enjoyed significant tax advantages by doing so through the use of the Family Limited Partnership.

A recent article in The New York Times titled “In an Unusual Tax Year, the Wealthy Turn to Partnerships” explores the power of the Family Limited Partnership (FLP). Properly structured, the FLP binds the family into a business arrangement (which is not always a good thing for a family) and, in doing so, allows for the longevity of a business entity, the decreased valuation allowable to private companies, and the simple ability to pool resources for higher investments.

When used correctly, there is much to be said about the FLP structure. On the other hand, there also are limitations and even outright warnings. For one, no business can safely exist without a purpose, and to form your FLP without a discernible purpose beyond avoiding estate taxes will certainly raise the ire of the IRS. Furthermore, as already intimated, it means the family must act with the swiftness and assurance of a business in their investments. Unfortunately, not all families are capable of acting like a “business.”

In the end, we face an uncertain and unpromising future in estate and gift laws (and a veritable “fiscal cliff” as a nation for related reasons). Nevertheless, at present we have extremely favorable lifetime gift tax exemptions ($5.12 million) for the remainder of 2012.

This may be the perfect storm to consider harnessing this powerful tool to generate some security for your family and family investments.

07/19/2012

In Beckwith v. Dahl (May 3, 2012), the California Court of Appeal, Fourth Appellate District, joined the majority of states in recognizing the tort of intentional interference with expected inheritance (IIEI).

In the darker and more unfortunate corners of estate law, one doesn’t need to look far to find family squabbles, double-crossing, and intrigue. Accordingly, in a majority of states the courts have a term to describe those who would throw a monkey wrench into an inheritance. It is the tort of “Intentional Interference with Expected Inheritance,” or IIEI for short.

The tort of IIEI was been recently recognized in California with the case of Beckwith v. Dahl (May 3, 2012). In fact, of the 42 states to consider the tort, 25 states have adopted it. While that is a majority, vast stretches of the country still have no specific legal context for the types of unfortunate fights that cripple so many families and level so many estates.

Still, it should be noted that the vast majority of estate difficulties giving rise to IIEI issues result from unplanned estates. I recommend reading the analysis of this California case in a recent Forbes article titled “California Joins Majority Of States In Recognizing Tort -- Intentional Interference With Expected Inheritance.” The Beckwith case is yet one more example of a will never being committed to paper. In that case, the would-be planner had very specific concerns to address in the form of a same-sex relationship. However, due to his lack of estate planning, his partner was disinherited due to the prevarications of a family member and certain legal defaults.

In general, the teaching point here is the old saying that “failing to plans means planning to fail.”

07/18/2012

When you inherit money or property you shouldn’t have to pay taxes. It’s not subject to income tax. Plus, if there’s an inheritance tax to pay, the estate or person giving it to you has already paid it or provided for its payment. At least that’s how it’s supposed to work. But what if it turns out the estate tax was not paid, or there’s an audit and the estate owes more?

Death does not necessarily mark the end of your estate. In fact, for some families, it may mean the beginning of your financial legacy. On the other hand, for other families, it may mean the beginning of some serious taxes.

The case recounts the story of Anna Smith, her fortunes in the Stateline Hotel, and the IRS audit that ultimately led to a battle over a lost fortune. Smith’s fortune was bound up in stock in the hotel, and it was worth enough at her passing to trigger an estate tax that the family elected to pay in installments over several years (which can be done). According to her estate plan, the family distributed the stock amongst themselves under with an agreement to set aside a portion to pay the estate taxes owed.

Apparently that agreement was reached in the “good days” of the hotel. In fact, those days were so good that the IRS audit on the estate tax return, years later, came up with higher numbers and a greater tax. Of course, when the IRS finally got around to making that decision, the hotel was not doing so well. However, the family agreed to pay the higher tax as a matter of duty and paid on those rates for several years.

Boom. The hotel value collapsed, the stock became worthless, and the estate had nothing left to pay for the taxes on the past wealth. The IRS, not being one to forgive and forget, didn’t forget and carried on the fight to the beneficiaries and personal representatives of the estate. In the end, the IRS held two members of the family acting as personal representatives to be personally liable, even though they did the right thing by the original numbers.

The original article is an interesting read and a sobering reminder, albeit far from unique. The IRS can audit any taxpayer, even if it’s an estate, and sometimes it has good reasons to do so. As a sidebar, the case demonstrates the importance of an accurate valuation.

Regardless, this U.S. v. Mary Carol S. Johnson serves as a lesson for those currently planning their estates. With the current lifetime gifting exemption pegged at $5.12 million, this may be a window of opportunity to pass significant wealth before the year’s end.

Bottom line: If the estate doesn’t fully pay off any amounts due, the IRS turns to the estate beneficiaries, sometimes even for amounts forgotten until years later.

07/13/2012

Family stories are different—yet of utmost importance. The philosopher Abraham Maslow said, “The ultimate disease of our time is valuelessness.” Poll results show that boomers agree. But how do you pass on something so intangible as a value?

Giving a gift is one thing, giving a lesson is another entirely. With a gift, you may make another happy, but with a lesson, you may make another wise. Interestingly, intangible gifts such as wisdom and values are of rising concern with baby boomers.

This concern is evidenced by the findings in a recent survey, as reported in an article in TIME Magazine’s Moneyland. In the article, titled “How to Give Heirs What They Most Want (It Won’t Cost Much),” more and more people consider “family stories” to be their greatest legacy, along with the lessons behind them. In fact, a whopping 86% of boomers named “family stories” as the most important part of their legacy, even if they also had complex assets to leave or a family tradition of wealth to continue.

Against this backdrop, the question today, as it has always been, is about how to instill or commemorate such values and heritage. The article concludes with this thought:

“It takes reflection to understand what is most important in your life and how you might get that message to heirs. But it won’t be a waste of time. Sometimes a scrapbook is worth more than an investment portfolio.”

For more ideas on this subject, be sure to consult the original article and speak with your estate planning attorney for creative approaches other clients have taken in the past.